Macau Gaming: Improving risk-reward

Transcription

1 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr February 2016 Sector Review Macau Gaming: Improving risk-reward Macau Consumer Discretionary Sean Quek, CFA Head of Equity Research (65) Investment summary Improving risk-reward While the sector downturn in 2015 was worse than expected with gross gaming revenues (GGR) falling 34% YoY, recent data suggests the sector is stabilizing. With lower base effect and gradual improvement since 2H15, we think overall GGR growth could turn positive after mid-year. We expect GGR to grow 6% in 2016, with flat VIP and 13% mass revenue growth. Mass market recovery is ahead of VIP and we expect to see mass market growth turn positive by 2Q Other catalysts include new resorts openings to attract more tourist arrivals, earnings upgrades from better than expected cost savings or GGR growth, more supportive policies such as transit visas loosening and potential lower than expected dividends cut. We like Sands China (1928 HK, Buy, FV HKD34) for its sustainable 7% dividend yield and largest mass exposure and Galaxy (27 HK, Buy, FV HKD38) for expected market share gains post its Galaxy Macau Phase 2 and Broadway Macau opening in Potential risks include tighter capital controls, larger than expected RMB depreciation which could reduce spending power, fewer gaming tables allocation for new resorts and slower ramp up of new Cotai resorts. Gaming revenue growth could turn positive from mid-2016 post 2015 disappointment The downturn in 2015 was weaker than expected, with gross gaming revenues (GGR) falling 34% after falling 2.6% in VIP revenues fell sharply by 4 YoY while mass revenues fell 27%. Key factors for the slowdown included concerns over UnionPay crackdown, tight transit visa controls, smoking ban, and China s anti-corruption efforts. However, recent data suggests the sector is stabilizing with 4Q15 GGR growing 2% QoQ for VIP and flat for mass revenues. With lower base and gradual improvement since 2H15, we think GGR growth could turn positive after midyear. For 2016, we expect 6% GGR growth, with flat VIP revenue growth and 13% mass revenue growth. In particular, mass revenues have been recovering faster than VIP revenues, with YoY decline narrowing to 3%/6% in Dec-15 and Jan-16 from 3 in 9M15. Read together with recent positive comments from LVS and Wynn and strong hotel bookings for Chinese New Year, we think the recovery remains on track. Monthly GGR growth could turn positive by mid-year Mass market growth recovery ahead of VIP MOP mn 25,000 20,000 15,000 10,000 5, Total revenue (MOPmn) YoY chg Mass revenue YoY % chg VIP revenue YoY % chg VIP stabilizing VIP revenue with signs of rolling chips volume pick-up Despite concerns about tighter capital controls amid ongoing RMB depreciation and anti-corruption campaign, VIP revenues had been stable in 2H15. VIP rolling chips volume had also improved since Nov-15, suggesting impact from junkets' consolidation in 2015 had largely been factored in. Liquidity might had been boosted by more new business/project loans usually approved at the beginning of the year while visa controls had also been eased with transit visa holders now allowed to stay for 7 days (from 5 days previously) and easier pre-trip document checks. 1

2 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan February 2016 Monthly VIP revenue has stabilized MOP mn 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, VIP rolling chips showing signs of pick-up MOP bn VIP Revenue (MOPmn) YoY chg VIP rolling chips volume (MOP bn) Mass new hotels supply to drive more overnight visitors and revenue We think growth in mass revenue is likely to turn positive in the next few months, possibly by 2Q Following the opening of Galaxy Macau and MPEL s Studio City in 2015, at least 2 new resorts Wynn Palace and Louis XIII are set to open in Mar-16 and Jul While Sands Parisian and MGM Cotai are also scheduled to open in 4Q 2016, we think they may be pushed back to 2017 as the government seeks to manage new supply. New resorts opening in to drive demand Strong focus on non-gaming for new resorts YoY chg Source: Company filings, Bloomberg Intelligence Source: Company filings, Bloomberg Intelligence With a strong focus on entertainment and non-gaming aspects, the new resorts should attract more tourists and players alike. The addition of more new hotels should also boost mass revenues as overnight visitors stay longer on gaming floors and spend up to 3-5x more than day-trippers in shops and restaurants. While there are concerns if there would be sufficient demand to absorb the estimated 64% increase in room supply from 2014, recent indicators had been supportive with improving hotel occupancy, growth in overnight visitors and no irrational pricing competition despite the 2 new resorts in Recent stabilization in VIP revenue and improving mass revenues also suggests recovery in premium mass revenue. In the medium term, the completion of more infrastructure facilities such as Taipa s Pac On ferry terminal (2H 2016), HK-Macau-Zhuhai bridge (~end-2017) and LRT should boost tourist arrivals. Hotel occupancy picking up despite more rooms Mass as % of revenue set to rise further % 9 85% 8 75% Total Hotel Guests Total Hotel Rooms Hotel Occupancy Rate (%) - RHS Source: Macau Statistics & Census Service, Bloomberg, BOS estimates VIP revenue Mass revenue Slot revenue 2

3 Potential catalysts 1. Earnings upgrade emerging 4Q15 reported results had been ahead of expectations thus far, partly due to higher than expected cost savings and lack of irrational competition to depress topline despite new resorts openings. With modest pay hike of 2.5% for civil servants in 2016, wage inflation is not expected to be a strong headwind and any further cost savings would likely be a positive catalyst. More importantly, continued improvement in GGR is likely to drive further earnings upgrade which will boost sentiment. 2. More supportive policies likely Transit visa restrictions were loosened in July 2015 and the head of China liaison office in Macau had also indicated in Oct-15 the central government was exploring ways to support the local economy and help Macau become a world class tourist destination. With Macau government expected to announce the results of mid-term review of the gaming sector in early 2016, we think more accommodative policy announcements could follow thereafter, eg. further relaxation of transit visa controls, expansion of individual visit schemes to more cities, introduction of multiple entries visa. 3. Potential dividend surprises While the market had been worried about potential dividend cuts due to weak earnings and capex outflows for new Cotai resorts, this should be largely priced in. Potentially, there could be positive surprises if dividends are maintained or cuts are lower than expected. Eg. Sands China announced FY15 interim dividends of HKD0.99 similar to FY14 which boosted expectations dividends would be sustainable given limited new capex ahead. Prefer Sands China and Galaxy Stocks have held up well YTD despite the market turmoil, down 3-7% and outperforming the HK/China indices decline of 14-19%. With improving GGR growth trend, stocks trading in-line with GGR trend are likely to see further upside. Our preference are Sands China (1928 HK, Buy, FV HKD34) for its sustainable 7% dividend yield and largest mass exposure and Galaxy (27 HK, Buy, FV HKD38) for expected market share gains post its Galaxy Macau Phase 2 and Broadway Macau opening in Valuations comparison, BOS estimates EV/EBITDA (x) Price/Earnings (x) Dividend Ticker Currency FY15E FY16E FY15E FY16E Yield (%) Yield (%) Sands China Ltd 1928 HK HKD Galaxy Entertainment Group 27 HK HKD n.a. Ltd MGM China Holdings Ltd 2282 HK HKD (2.1) SJM Holdings Ltd 880 HK HKD (6.9) Wynn Macau Ltd 1128 HK HKD (19.7) FCF Sands China s 12M forward EV/EBITDA Sands China s 12M forward P/E 3

4 Galaxy s 12M forward EV/EBITDA Galaxy s 12M forward P/E Potential risks 1. Tighter capital controls UnionPay introduced annual cap of RMB100,000 for overseas cash withdrawal starting beginning 2016 vs current cap of RMB10,000 per day. Macau s banking regulators have also announced real-time monitoring of China bank cards. This could incrementally impact the pawnshop business and hence affect premium mass revenue growth. VIP is less affected with players usually relying on junkets or casinos direct liquidity. 2. Larger than expected RMB depreciation Our house view currently expects USDCNY to depreciate to 7.0 on 12-month view. Faster than expected depreciation could reduce spending power for Chinese players. 3. Lower than expected new tables allocation Based on the 3% annual table cap increment rule from 2012 to 2022, most operators are expected to get gaming tables for their new casinos. While we have assumed a phased allocation of tables, lower than expected allocation could bring earnings downside risks. 4. Disappointment from Cotai openings VIP growth may not pick up even with new resorts opening. This may lead to further earnings and multiples de-rating. [Disclaimer] This research paper provides an analysis of a specific security taken in isolation. It does not take into account the reader s overall portfolio, his investment objectives, risk tolerance, portfolio diversification, and particular needs. The reader should consider, with or without the assistance of the Relationship Manager or the Investment Counselor, whether the advice is appropriate in the light of the reader s existing portfolio holdings and/or the reader s investment needs. RISK RATING (1) Very Low Risk, (2) Low Downside Risk, (3) Moderate Downside Risk, (4) High Downside Risk, (5) Very High Downside Risk The description of risks in this document does not purport to be an exhaustive list of the risk factors associated with investment in the Financial Products mentioned in this document. Before making any investment, the reader should consider all risks carefully and consult an independent financial adviser as necessary before dealing with any Financial Products mentioned in this document. ANALYST DECLARATION The analyst(s) who prepared this report certifies that the opinions contained herein accurately and exclusively reflect his or her views about the securities of the Company, and that he or she has taken reasonable care to maintain independence and objectivity in respect of the opinions herein. *The analyst(s) who wrote this report does not hold securities in the Company. The analyst(s) receives compensation based on the overall revenues of Bank of Singapore Limited, and no part of his or her compensation was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this report. The reporting line of the analyst(s) is separate from and independent of the business solicitation or marketing departments of Bank of Singapore Limited. *The analyst(s) or his/her associate confirms that he or she does not serve as directors or officers of the Company, and the Company or other third parties have not provided or agreed to provide any compensation or other benefits to the analyst(s) in connection with this report. GENERAL DISCLAIMER This Document is for Internal Use & Circulation to Customers This document, prepared by Bank of Singapore Limited (Co Reg. No.: R) (the Bank or Bank of Singapore Limited ), is for the customer s information only and is not intended for anyone other than the customer. It is not an offer or a solicitation to deal in any of the financial products referred to herein or to enter into any legal relations, nor an advice or a recommendation with respect to such financial products. It does not have regard to the specific investment objectives, financial situation and the particular needs of the customer. The customer is advised to 4

5 exercise caution in relation to any investment. The customer should independently evaluate each financial product and consider the suitability of such financial product, taking into account the customer s own specific investment objectives, investment experience, financial situation and/or particular needs. If the customer is in doubt about the contents of this document and/or the suitability of any financial products mentioned in this document, the customer is strongly advised to obtain independent financial, legal and/or tax advice from the customer s professional advisers as appropriate, before dealing in any financial products mentioned in this document. Bank of Singapore Limited is a licensed bank regulated by the Monetary Authority of Singapore in Singapore and an Authorized Institution as defined in the Banking Ordinance of Hong Kong (Cap 155), regulated by the Hong Kong Monetary Authority in Hong Kong. This document and other related documents have not been reviewed by, registered or lodged as a prospectus, information memorandum, profile statement or product highlight sheet with the Monetary Authority of Singapore or any regulator in Hong Kong or elsewhere. This document may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Bank s prior written consent. This document is not intended for distribution to, publication or use by any person in any jurisdiction outside Singapore, Hong Kong, or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons, associated persons and/or affiliates (collectively, Affiliates ) to any registration, licensing or other requirements within such jurisdiction. While reasonable efforts have been made to ensure that the contents of this document have been obtained or derived from sources believed by the Bank and its Affiliates to be reliable, neither the Bank nor its Affiliates have independently verified the accuracy of such source(s). The Bank and its Affiliates and their respective officers, employees, agents and representatives do not make any express or implied representations, warranties or guarantees as to the accuracy, timeliness or completeness of the information, data or prevailing state of affairs that are mentioned in this document and do not accept any liability for any loss or damage whatsoever, direct or indirect, arising from or in connection with the use of or reliance on the contents of this document. The Bank and its Affiliates may have issued other reports, analyses, or other documents expressing views different from the contents hereof and all views expressed in all reports, analyses and documents are subject to change without notice. The Bank and its Affiliates reserve the right to act upon or use the contents hereof at any time, including before its publication herein. Bank of Singapore Limited forms part of the OCBC Group (being for this purpose Oversea-Chinese Banking Corporation Limited and its subsidiaries, related and affiliated companies). Bank of Singapore Limited adheres to a group policy (as revised and updated from time to time) that provides how entities in the OCBC Group manage or eliminate any actual or potential conflicts of interest which may impact the impartiality of research reports issued by any research analyst in the OCBC Group. Bank of Singapore Limited, its employees and discretionary accounts managed by the Singapore office may have long or short positions or may be otherwise interested in any of the financial products (including derivatives thereof) referred to in this document and may from time to time dispose of any such financial products. Entities in the OCBC Group may act as market maker or may have assumed an underwriting commitment in respect of, perform or seek to perform broking, banking, and other investment or securities-related services for the company(s) whose securities are mentioned in this document as well as other parties generally. Past performance is not always indicative of likely or future performance. The value of any investment or income may go down as well as up. All investments involve an element of risk, including capital loss. Customers who are interested in investing in any financial product should read the risk disclosures and governing terms and conditions that are set out in the relevant offering documents. Cross-Border Marketing Disclaimer Brunei: This research report has not been delivered to, licensed or permitted by the Autoriti Monetari Brunei Darussalam, the authority as designated under the Brunei Darussalam Securities Order, 2001, the Mutual Funds Order 2001 and the Banking Order 2006; nor has it been registered with the Registrar of Companies, Registrar of International Business Companies or the Brunei Darussalam Ministry of Finance. This research report is not registered, licensed or permitted by the Autoriti Monetari Brunei Darussalam or by any other government agency or under any law in Brunei Darussalam. This research report is for information purposes only. It does not constitute an offer to buy or sell or a solicitation of an offer to buy or sell any securities or any interests and is subject to correction, completion and amendment without notice. No recipient of this publication may issue, distribute, circulate, disseminate, offer or sell this publication or make or give copies of this publication to any other person. No recipient of this publication may make use of the publication other than for its own general information purposes. Any offers, acceptances, subscription, sales and allotments of a financial product in reliance of this research report shall be made outside Brunei Darussalam. Nothing in this research report shall constitute legal, tax, accounting or investment advice. The recipient should independently evaluate any specific investment with consultation with professional advisors in law, tax, accounting and investments. Canada: This research report does not constitute or form part of any offer or invitation for the sale or purchase of securities or any of the assets, business or undertaking described herein nor shall it or any part of it form the basis of or be relied on in connection with, or act as any inducement to enter into, any contract or commitment whatsoever. This research report provides general background information only. It is information in a summary form and does not purport to be complete. It is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any particular investor. These should be considered, with or without professional advice, when deciding if an investment is appropriate. The contents of this research report are not to be construed as legal, financial or tax advice. Each prospective investor should contact his, her or its own legal adviser, independent financial adviser or tax adviser for legal, financial or tax advice. Indonesia: The offering of the investment product in reliance of this research report is not registered under the Indonesian Capital Market Law and its implementing regulations, and is not intended to constitute a public offering of securities under the Indonesian Capital Market Law and its implementing regulations. According, this investment product may not be offered or sold, directly or indirectly, within Indonesia or to citizens (wherever they are domiciled or located), entities or residents, in any manner which constitutes a public offering of securities under the Indonesian Capital Market Law and its implementing regulations. Israel: No action has been or will be taken in Israel that would permit a public offering of the securities and/or funds, or distribution of the prospectus and/or private placement memorandum to the public in Israel in reliance of this research report. The prospectus and/or private placement memorandum has not been approved by the Israel Securities Authority. The fund is not regulated under the provisions of Israel's Joint Investment Trusts Law, Accordingly, the securities and/or funds shall only be sold in Israel to investors of the type listed in the First Schedule to Israel s Securities Law The investor will be required to confirm in writing prior to any purchase of the fund units/shares that it is an investor of the type listed in the First Schedule to Israel s Securities Law, , that it is aware of the implications of being treated as such an investor, and consents to such treatment. Kazakhstan: This document, prepared by the Bank of Singapore Limited is for information purposes only and is not an offer or a solicitation to deal in any of the financial products referred to herein or to enter into any legal relations, nor an advice or a recommendation with respect to such financial products. This document is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any recipient. You should independently evaluate each financial product and consider the suitability of such financial product, taking into account your specific investment objectives, financial situation or particular needs, and you should consult an independent financial adviser, as may be necessary, 5

6 before dealing with any financial products mentioned in this document. For the avoidance of doubts, any services or products if to be rendered or delivered by the Bank will be in all circumstances rendered and delivered, respectively, from outside of Kazakhstan. Kenya: This document has not been nor will it be approved by the Capital Markets Authority of Kenya. The offer of interests in the securities does not constitute an offer to the public within the meaning of section 57 of the Companies Act (Chapter 486 of the Laws of Kenya). The offer of interests in the securities in Kenya will be carried out as a "private offer" within the meaning of regulation 21 of the Public Offer Regulations (as amended). This document will be distributed in Kenya to a limited number of investors and will not be provided to any person other than the original recipient, and may not be reproduced or used for any other purpose. The interests in the securities may not be offered or sold directly or indirectly to the public in Kenya. Malaysia: Bank of Singapore Limited does not hold any licence, registration or approval to carry on any regulated business in Malaysia (including but not limited to any businesses regulated under the Capital Markets & Services Act 2007 of Malaysia), nor does it hold itself out as carrying on or purport to carry on any such business in Malaysia. Any services provided by Bank of Singapore Limited to residents of Malaysia are provided solely on an offshore basis from outside Malaysia, either as a result of reverse enquiry on the part of the Malaysian residents or where Bank of Singapore Limited has been retained outside Malaysia to provide such services. As an integral part of the provision of such services from outside Malaysia, Bank of Singapore Limited may from time to time make available to such residents documents and information making reference to capital markets products (for example, in connection with the provision of fund management or investment advisory services outside of Malaysia). Nothing in such documents or information is intended to be construed as or constitute the making available of, or an offer or invitation to subscribe for or purchase any such capital markets product. Nigeria: Customers are advised to seek further financial advice as Bank of Singapore Limited staff and/or the Bank of Singapore Limited will not be liable for judgment and decisions reached by the customers save to the extent provided by law of Singapore. South Korea: The research report does not constitute an offer, solicitation or investment advertisement to trade in the investment product referred to in the research report. Taiwan: The provision of the information and the offer of the service concerned herewith have not been and will not be registered with the Financial Supervisory Commission of Taiwan pursuant to relevant laws and regulations of Taiwan and may not be provided or offered in Taiwan or in circumstances which requires a prior registration or approval of the Financial Supervisory Commission of Taiwan. No person or entity in Taiwan has been authorised to provide the information and to offer the service in Taiwan. Thailand: Please note that neither Bank of Singapore Limited nor any other entities in the Bank of Singapore Limited s group maintains any licences, authorisations or registrations in Thailand nor is any of the material and information contained, or the relevant securities or products specified herein approved or registered in Thailand. Interests in the relevant securities or products may not be offered or sold within Thailand. The attached information has been provided at your request for informational purposes only and shall not be copied or redistributed to any other person without the prior consent of Bank of Singapore Limited or its relevant entities and in no way constitutes an offer, solicitation, advertisement or advice of, or in relation to, the relevant securities or products by Bank of Singapore Limited or any other entities in Bank of Singapore Limited s group in Thailand. Dubai/U.A.E: The information contained herein is exclusively addressed to the recipient. The offering of certain products in this document has not been and will not be registered with the United Arab Emirates Central Bank or the United Arab Emirates Securities & Commodities Authority. Products in this document are being offered or sold in the United Arab Emirates in circumstances which do not constitute a public offering or distribution of securities under the applicable laws and regulations of the United Arab Emirates. The distribution of the information contained herein by the recipient is prohibited. United Kingdom: The Bank of Singapore Limited is authorised and regulated in Singapore by the Monetary Authority of Singapore. The Bank of Singapore Limited is not authorised in the United Kingdom by the Financial Conduct Authority for the conduct of investment business. The services provided by the Bank of Singapore Limited are not covered by the UK s Financial Services Compensation Scheme and neither the Prudential Regulation Authority nor the Financial Conduct Authority supervises or regulates the products or services provided by the Bank of Singapore Limited to UK residents. 6